Sector CFDs

If you have been around trading or the financial markets for any length of time, you will be familiar with the concept of market sectors. This idea breaks down the commercial interests into groups of similar products, such as transportation, which includes trains, buses, etc., or energy which would include gas, electricity, and oil companies.

As you might expect, given the flexibility of contracts for difference, you are able to trade in sector CFDs. There are several sectors from which you can choose, and the most obvious ones are the financial sector, health, energy, technology, retail, etc. Using sector CFDs you can trade in a way which would be difficult if you only traded stocks.

One of the advantages of trading with sector CFDs instead of stocks is that the sector will tend to average out the volatility of the associated stocks in that sector. Thus you are not exposed to the individual fluctuations experienced when trading single companies. This may be considered a good thing if you are trading on the basis of a growth area where you are not sure which companies will succeed.

It is much easier to identify significant trends when you consider the sector chart than if you try to interpret the charts of many separate companies, and many people consider that it is best to make trades which are in line with the prevailing trend, as this gives a better percentage return.

When you trade with sector CFDs, you anticipate that one area of the market is more likely to perform than others, for instance recently oil has performed very differently from other types of shares. Note that you can trade CFDs either long or short, thus it is easy to make a trade which anticipates a loss of value in the sector, and will profit from that.

Another sector that has done well recently is mining, because with the rise of the Chinese economy there is an ever increasing demand for raw materials. Using a sector CFD would mean that you do not have to choose which mining company is going to perform the best. This is a great advantage, because mining companies tend to be erratic depending whether or not they have found new resources.

This is not to say that there are not problems with trading sector CFDs, and you should be aware of the disadvantages so that you can avoid them. One of the cited disadvantages is that the spreads between the buying and selling price tend to be quite wide. The spread is the way the broker makes a profit, as no commission is charged for trading the CFDs, but a wide spread means that you need to wait for a more significant movement in price in order to get into profit.

This idea that runs a counter to the normal philosophy when trading CFDs. The longer you hold the CFDs, the more you will incur in interest charges because of the amount of leverage that you are enjoying. Leverage is the intrinsic advantage of trading such contracts, and means that you do not need so much money for your trading in order to realize good profits. However, there is a cost involved with the leverage which means that the more days you hold a CFD waiting for it to increase, the more it costs you.

As a sector contract for difference is considered to represent a basket of shares, you will find that the same principle applies when the dividends are issued as when you are holding individual shares. That is, if you have a long position in a sector CFD and dividends are declared, your account will be credited with nearly the full equivalent value of the dividends. On the other hand, if you hold a short position your account will be debited for the full dividend value.

As there are different market makers for sector contracts, you may find some disparity between the charts and values quoted to you and the figures that you can find elsewhere. If you are considering much involvement with trading sector CFDs, you will want to compare brokers to see who has the most advantageous prices.

Without doubt, it pays to compare the costs of trading sector contracts for difference with equity CFDs. For instance, if you are considering buying CFDs in the telecom sector, an alternative approach could be to buy equity CFDs in British Telecom, which any case dominates the market sector, as this would have lower spreads and make the trade more profitable.

In a similar way to other asset classes, you may also find profitable options in pairs trading sector CFDs. If you anticipate that health care will perform better than the financial sector, then you can buy long sector CFDs in healthcare and short sector CFDs in finance. This has the advantage that you do not mind how the economy in general performs, you will make a profit if you are right and healthcare does better than the banks.

A further refinement is when you have identified a company in a certain sector that you believe will outperform the others. In this case, you could go long with the equity CFDs in the company, and short the sector CFDs. If all the companies did well, you would lose money on the sector CFDs but gain significantly on the individual company. If your choice performed better than the sector, then you would not mind if the sector as a whole rose or fell in value because your pairs trading would compensate, and you would still realize a profit on the overall trade. This is a sophisticated comparative trading technique, and the flexibility of CFD trading means that you can implement it easily.